Don't ever let your business get ahead of the financial side of your business. Accounting, accounting, accounting. Know your numbers.” - Tilman J. Fertitta
When it comes to financial statements, one size definitely doesn't fit all. In fact, as your business grows and evolves, your financial statements should too. Their primary purpose shouldn't change, which is to provide business owners with actionable information. However, as a business matures, and potentially becomes more complex, with an increasing number of opportunities to pursue (or not) the statements need to be able to keep up.
There isn't a hard and fast rule about what you should look at, and at what stage those needs will vary. What should be true, however, is the owner's commitment and rigor around the process of what is reviewed and when. For businesses that lack the full-time need of a CFO, a part-time or project CFO will provide the expertise necessary to produce financial statements that are appropriate and relevant to generate information (not just data) that helps solve real business problems.
I happen to lead an organization made up of those financial executives and can offer that I face the same challenges you do when evaluating what I need to run the firm. Primarily, how do I make sure I have what I need to make good business decisions?
What are Your Necessary Financial Statements?
Your company's financial statements are periodic reports that convey information about recent results and financial health. In a traditional sense, the "core" financials will include:
- P&L Statement. Also referred to as the Income Statement, this reveals your organization's revenue, expenses, and net income or loss for a particular reporting period. Other figures represented include your total sales, cost of revenue, taxes paid, interest expense, and operating profit.
- Balance Sheet. This financial statement provides a snapshot of your company's position relative to its assets, liabilities, and shareholder's equity. It is based on the accounting equation: –Assets = Liabilities + Shareholders Equity. This statement gives vital data about your company's accounts receivable, debts, cash and equivalents, long-term investments, retained earnings, and number of shares outstanding.
- Statement of Cash Flow. Since a majority of companies that fail do so because of cash issues, you will want to review this statement closely for any signs of trouble. Your cash flow statement, delivered monthly, quarterly, and annually, shows how your firm's liquid assets are rising or falling over time. Positive cash flow is an indicator that more money is flowing in than out of the company's accounts. Conversely, negative cash flow could be an indicator of financial difficulty.
These monthly, quarterly, and annual statements are prepared and issued in a manner that adheres to Generally Accepted Accounting Principles, or GAAP. This is a set of authoritative standards that dictate the commonly accepted means of recording and reporting a company's financial information. In other words, GAAP ensures consistency in reporting and makes it simpler for top managers to analyze and make decisions based on reported information.
Those three core financial statements are an excellent start, but business owners need more. The financial information required to successfully run an organization is more than a Balance Sheet and P&L Statement. It also includes a cash forecast, KPIs, and operating information unique to each business. Some of the other reports that your organization might need include:
- Accounts Payable. Reports referencing accounts payable give you a closer look at your company's payments on short-term or recurring debts. You can use these reports to verify bill payments and track the history of payments made within specific departments.
- Accounts Receivable. You won't stay in business long if you are giving away products and services for free. An accounts receivable aging report allows you to see where you stand with respect to the aging of your accounts receivable. What is your average collection period? Do you have a significant number of accounts that are delinquent?
- Inventory Reports. Inventory reports give you the information necessary to see how quickly your company is able to turn over the inventory that it has in stock. Managing inventory efficiently can be a challenge, and this periodic report can help you get and remain on track to the most efficient use of company resources.
- Cash Forecast. The main financial reports might tell you how much cash you have at a particular point in time, but this doesn't necessarily help you plan for the coming period. What if you have a major equipment acquisition or other payment due that is outside the norm? A cash flow forecast report can be prepared monthly or weekly to give you this valuable data and insight.
- KPIs. The reports previously discussed might give you the impression that your business is running smoothly, and you might be right! However, there are some Key Performance Indicators (KPIs) that will deliver even more information about performance in a variety of areas. Some commonly used financial KPIs include:
- Gross Profit Margin. This ratio helps to signal whether you are appropriately pricing your goods and services. (Gross profit margin = (revenue - cost of goods sold)/revenue). This margin should be sufficient enough to take care of your fixed operating expenses and then leave you with a reasonable profit at the end of the period.
- Net Profit Margin. This ratio indicates how much of your revenue is profits. (Net profit margin = net profit / total revenue). This is a good benchmark to use for setting profitability goals.
- Current Ratio. This ratio quickly tells you how liquid your business is at a given point in time. (Current ratio = current assets / current liabilities). A current ratio of less than 1 means that you don't have enough cash to pay your bills. A more ideal figure is between 1.5 and 3.
The list of information and reports that you could use is endless. A thoughtful review of what is truly important for your organization to be successful is required. (Hint: If you need guidance here, a CFO can help!)
This combination of financial and operating information enables business owners to look backward to ensure compliance. At the same time, they can look forward to assist with the growth of their organization and avoid potential problems in their path.
Why Financial Statements are Vital for Your Business
Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.”
- Diane Garnick
You may have had one story when you started your business, but that narrative quickly evolves when money starts changing hands. Goals shift as do strategies when it becomes evident that something is either more challenging than anticipated or just different. Going through these motions in the dark could spell disaster for your company.
The rigor associated with preparing financial information is essential for all organizations. Business leaders who don't have financial statements generated on a monthly basis (e.g., by the 10th of each month for the prior period) are trying to run their organizations while wearing a blindfold.
The appropriate, relevant data found in the right set of financial statements will allow a business owner to focus on solving the particular issues that their business faces. Going beyond the basics is often where the true value lies. Limiting the information to that which is found on traditional GAAP-based financial statements often falls short of what is required to truly understand the issues impacting your organization. You need to expect more!
Who Generates Your Firm's Financial Statements?
So, who should you expect more from? As a business owner, you want the absolute best that everyone in your organization has to give, but you also need the right information to assess performance and make strategic plans. This begins with your financial team.
Financial statements are generated by a company's finance or accounting department, ideally with the oversight of the CFO. Other senior accounting or finance department team members may generate the statements. However, accountants and controllers often have a backward focus on what has happened. This is done to ensure compliance.
Worrying about the future requires additional expertise. The ability of financial statements to envision the future through cash forecasts and "what-if" scenarios calls for a higher-level perspective - that of a CFO. This may not be a full-time role in your company, but someone wears the title. While your business may not need a full-time CFO, all organizations need some form of financial leadership.
Financial Statement Best Practices
Accounting is the language of business." - Warren Buffett
A good financial system is vital to ensure the survival and prosperity of your business. Accurately tracking financial data not only plays a crucial role in monitoring the overall stability and health of your company but also gives business leaders the information they need to run day-to-day operations and make plans for the future.
If you're on board with creating the best possible system to ensure your company's financial future, there are several best practices that you can begin to follow that can help your business stand apart from the crowd.
- Timely calculations. It would be a grave error to put off your financial reporting when you perceive that everything is going "well." There could be unanticipated expenses on the horizon, or even in the recent past, that could create speed bumps for your business. Instead, core financial statements should be generated after each monthly close. As a general rule, a close should happen as soon as reasonably possible following the end of the period. When reporting by calendar month, this is usually by the 10th, but organizations that embrace automation can often close much more quickly, sometimes as soon as 3-4 days after the period end.
- Consistent reporting. Your company's financial statements should reflect the same topical information each month and quarter. This makes it simpler to identify trends and anomalies. But don't forget your audience! As your organization's information needs evolve, don't hesitate to tailor your reporting to better fit those requirements. Running your business is a top priority. That being said, you also have to consider the costs. What you learn from these reports may not justify the cost of generating the information.
- Report planning. Quarterly and particularly year-end financial reporting can be a massive undertaking. This is particularly the case if you do business across state lines and abroad. You can take a project approach to these major reports - assigning a project manager who creates schedule timelines and allocates resources - which will allow your business to better strategize and prepare for these vital reports.
- Budgets and Forecasts. Your company should create a budget at least annually as a way to benchmark its financial performance throughout the year. It should also create and update its cash flow forecasts regularly so that it is prepared for future events. (Note: this is different than you Statement of Cash Flow, which reports on past inflows and outflows of cash).
- Additional reports. As you work with your financial leadership team, you'll put together a list of other core financial reports to be delivered each period. Some you might even request daily. These are key items that will help you understand how your business is performing so that you can make plans and react to an ever-changing business landscape.
- Periodic meetings. It's often not enough to just have a batch of financial reports land in your inbox. There may be footnotes to go over or other items that require explanation. So that you fully understand this information and can communicate your goals, have regularly scheduled meetings with the CFO to review core financial statements and other KPIs.
- Internal auditing. It would be a shame to make major business decisions based on inaccurate or missing data. You can avoid this by scheduling periodic internal audits to ensure data accuracy and completeness.
What Business Owners Should Expect from Their Financial Statements
Being a business owner doesn't instantly make you an expert in small business accounting or finance. In reality, most entrepreneurs learn the basics of bookkeeping, funding, and managing cash flow as they go. The good news is that you will get some relief when you have financial leadership in your corner, whether full-time or part-time. As a business owner, the periodic financial statements you will receive will provide several benefits.
- View Historical data. Your "core" financial statements should create a snapshot of what has happened over the last period (month, quarter, year).
- Assess progress. Because your reports are consistent, you can compare them between periods to assess progress. You can also compare results against your goals, i.e., "actual vs. budget."
- Identify issues. Your periodic financial reports give visibility, and the information necessary, to solve potential problems before they occur.
- Allow interactive reporting. Speak to your financial manager about the availability of interactive reporting. This allows you to model various solutions or growth options, using "what if" scenarios, to assist in strategic decision making.
- Build transparency. Financial reporting can allow your company to foster a culture of transparency, where employees receive more information about their company, fostering a greater sense of ownership and commitment.
How Do I Get the Information I Need?
Accurate, complete, and timely financial reporting isn't something that lands on your desk with minimal effort. It requires a certain degree of expertise and knowledge to assemble the correct data and put it into a report that is not only consistent, but that also makes the most sense for the management of your business.
One of the best ways a business can get the answers that good financial and operational reporting provides is to retain a CFO. If you find that a full-time CFO isn't appropriate for your business, there are alternate solutions. By retaining a part-time or project-focused CFO, a smaller business can receive the same quality of information and vital financial expertise as a larger enterprise.
Every business is unique in its operations and strategic direction. A business's goals can be best achieved by expending only the resources that are necessary to resolve a particular issue. This enables remaining resources to be deployed in other areas of the business to propel it forward. Accurate and timely financial information, however, is a must.
About the Author:
Kevin Briscoe’s professional career spans over 20 years in finance, accounting, and operations in publicly traded corporate and small closely held settings. Kevin excels in financial analyses and accounting operations, implementing internal controls, and creating and implementing organizational systems. He has held ownership and management positions, demonstrating an outstanding ability to provide effective leadership in increasing profitable growth throughout his career.